Overview: With a US-Japanese deal in hand, and the prospects of an extended tariff truce between the US and China, many perceive some tail risks associated with the US foreign economic policy have diminished. This has encouraged the animal spirits and helped drive equity prices higher. The dollar is mixed. The uptick in Australia's PMI and cautionary comments from the governor of the Reserve Bank of Australia have helped lift the Australian dollar to new highs for the year and puts it atop the G10 performers today. On the other hand, a disappointing UK PMI pushed sterling down around 0.25% today and is the laggard among the G10 currencies. Emerging market currencies are mixed. Thai-Cambodia clashes weigh on the baht. The PBOC set the dollar's fix at a new low since last November, and the greenback recorded a new low for the year against the offshore yuan (below CNH7.15) before recovering.
Australia, South Korea, and India are exceptions in the rally in Asia, which saw the Nikkei extend yesterday's rally with another 1.6% gain today. The MSCI Asia Pacific Index was up about 0.8% today. Europe's Stoxx 600 gapped slightly higher today and is up about 0.65% after rising nearly 1.1% yesterday. The S&P 500 and Nasdaq futures are trading firmly. Bond markets are under pressure. In Europe, benchmark 10-year rates are mostly about three basis points higher, though the 10-year Gilt yield is nearly flat. While the 10-eyar JGB yields edged up to almost 1.60%, the yields on the 30- and 40-year JGBs soften a bit. The 10-year US Treasury yield is up a little more than a basis point to approach 4.40%. Gold reversed lower after reaching almost $3439 yesterday and settled slightly above $3387. It has been sold to nearly $3362 today. The week's low, set Monday, was around $3345. September WTI is recovering from yesterday's dip below $65 and is trying to find footing above $66 today. The 200-day moving average is slightly above $66.
USD: The Dollar Index overshot the (61.8%) retracement of this month's gain, seen near 97.35 to fall to a little below 97.20. It slipped to 97.10 today but is hovering around 97.40 in late European morning turnover. The US reports weekly jobless claims, which have fallen for the past five weeks, the longest decline since Aug-Sept 2022. However, next week's non-farm payroll report has more heft, and the early call is for job growth to have slowed (~115k vs. 147k in June) and for the unemployment rate to have risen (4.2% vs. 4.1%). Also, on tap today are new home sales, which are expected to stabilize after a heady 13.7% decline in May. The preliminary PMI is also due. The manufacturing PMI may slip for the first time since March. The services PMI may pare the 0.8% fall in June. The composite (output) PMI is seen easing for the second consecutive month.
EURO: The euro held above $1.0710 yesterday and ratcheted up to$1.1775, a 12-day high, helped by creeping optimism that a trade deal will be struck. It reached $1.1780 today before pulling back to almost $1.1745. The high set earlier this month was closer to $1.1830, which had not been seen since September 2021. The flash July PMI was slightly firmer sequentially, but the manufacturing sector continues to contract, albeit slowly (49.8 vs. 49.5). Yet the PMI has risen for the seventh consecutive month and has not been above 50 since Russia's invasion of Ukraine in early 2022. Services activity is improving. The 51.2 reading (50.5 in June) is the best since January. The composite edged higher for the second consecutive month, and at 51.0 (50.6 in June) matched the highest level since May 2024. It has held above 50 this year after 2024 finished at 49.6. The German economy appears to be struggling to sustain the upside momentum. The composite PMI slipped slightly (50.3 vs. 50.4 in June) after dipping to 48.5 in May, though the manufacturing and services PMI ticked up. The French PMIs, the manufacturing, services, and composite PMI, remain below 50. The French composite PMI has not been above 50 since last August (which was a one-month wonder). It stands at 49.6 (49.2 in June). The ECB meeting is as much of forgone conclusion as these things get. There is practically no chance of a change in policy with the deposit rate at 2%. ECB President Lagarde is unlikely to provide much forward guidance, but the market sees the central bank on hold until at least the end of the December meeting. The swaps market has about a 50% chance of a September cut and about a 65% chance of a cut at the end of the October meeting. Lastly, the EU-China summit today may be important in the bigger picture but does not seem impactful today.
CNY: Many, if not most observers, share our understanding that the PBOC's daily dollar fix is the chief way that Beijing manages the exchange rate. With Chinese exporters earning dollar revenue in a weakening dollar environment, it is not surprising that they are repatriating earnings and buying yuan. This leaves the banks as sellers of yuan and buyers of dollars. Yet, when some observers read media reports of state-owned banks buying dollars, they conclude it is "stealth intervention." We recognize two developments: First, the PBOC has adjusted the dollar's daily reference by a larger magnitude than at the start of the year. Second, since mid-April, the PBOC has been fairly steadily lowering the dollar's fix, and it is now the lowest since last November. Today's reference rate was set at CNY7.1385 (CNY7.1414 yesterday). The dollar was sold to a new low for the year against the offshore yuan near CNH7.1440 today before recovering to new session highs near CNH7.1545. The five-day moving average is slipping through the 20-day moving average. Note that the CNH7.1460 area corresponds to the (61.8%) retracement of the dollar's rally from last September's low (~CNH6.97) to April's high (~CNH7.43).
JPY: The dollar slipped in early North American turnover yesterday to almost JPY146.10. It eased below the 20-day moving average (~JPY146.20) for the first time in a couple of weeks. The mild follow-through dollar selling today met the (50%) retracement target of the rally from the July 1 low seen slightly below JPY145.95. The (61.8%) retracement is near JPY145.15. While many have focused on the trade agreement that brought down the reciprocal tariff and auto tariff to 15% from 25%, the agreement of $550 bln in direct investment is also significant. The details have not been published but consider that Japanese direct investment in the US tends to average $30-$40 bln a year. That includes retained earnings, while the new deal appears to envisage greenfield investment. And note that as of the end of 2024, Japan's stock of direct investment in the US was worth around $755 bln. The FDI commitment is around 18% of Japan's GDP. Meanwhile, the preliminary July composite PMI was steady at 51.5. The high for the year was seen in February at 52.0. The composite PMI was at 50.5 at the end of 2024. The manufacturing PMI rose above 50 in June for the first time since June 2024 but fell back below it in July (48.8). The services PMI jumped to 53.5 from 51.7. Its peak was also in February (53.7). Lastly, note that the swaps market is feeling more confident of a rate hike late this year. A little more than two weeks ago, the swaps market had about 10 bp of tightening discounted. It now stands at 21 bp, the most since early April.
GBP: Sterling rose for the third consecutive session yesterday and briefly traded to almost $1.3585. It reached the (50%) retracement target of the decline from the July 1 high. That retracement, near $1.3575, is above the 20-day moving average (~$1.3570). It has been turned back from almost $1.3590 today. Initial support is seen near $1.3515-20. The preliminary July composite PMI fell for the first time in three months to 51.0 from 52.0, which is the year's high. The manufacturing PMI rose for the fourth consecutive month to 48.2 (from 47.7). It has not been above 50 since last September. The services PMI eased to 51.2 (from 52.8). One might not know it by looking at the PMI, but the UK monthly GDP contracted in April and May, and after growing by 0.7% in Q1, the median economists forecast in Bloomberg's survey is for a 0.1% quarter-over-quarter expansion in Q2.
CAD: The US dollar recovered yesterday after it was initially sold to almost CAD1.3575. The year's low was set in mid-June near CAD1.3540 and this month's low was about CAD1.3555. On the bounce, the greenback reached around CAD1.3635, but it finished little changed around CAD1.3600. Options for around $380 mln expire there today. The CAD1.3650 area is the (38.2%) retracement objective of the US dollar's pullback from last week's high (~CAD1.3775). The 20-day moving average is slightly higher (~CAD1.3660) and the (50%) retracement is about CAD1.3675. Canada reports May retail sales today and StatsCan warns of the largest decline since the 1.2% decline in May 2024. Excluding autos, it may be the third consecutive decline, a streak not seen since the early days of the pandemic. Still, with the central bank having front-loaded rate cuts, there is little chance of a cut next week when the Bank of Canada meets (July 30).
AUD: The Australian dollar reached a new high for the year today near $0.6625. Recall that last Wednesday, the Aussie recorded the month's low near $0.6455. It settled firmly yesterday, slightly above $0.6600. The daily momentum indicators are mixed and there appears to be little resistance ahead of the $0.6700-$0.6715 area. Two developments have helped support the Aussie today. First, Australia's preliminary composite July PMI rose to a new high for the year 53.6 (vs. 51.6 in June). It is a new cyclical high. The manufacturing PMI quickened (51.6 vs. 50.6) to snap the deterioration of the past three months. The services PMI also stands at a new high for the year (53.8 vs 51.8). Second, central bank Governor Bullock seemed to signal caution with her emphasis on the “measured and gradual" approach to the easing cycle. Still, the market has little doubt that the Reserve Bank of Australia will cut rates at next month's meeting and deliver at least one more cut in Q4.
MXN: Mexico reports CPI for the first half of July. Economists in Bloomberg's survey expected the third consecutive year-over-year decline in the bi-weekly reading and first sub-4% reading since the second half of April. In fact, if the median forecast in the survey is accurate (3.61%), it would be the lowest since the end of January. The overnight target rate is 8.0% and the swaps market anticipates a quarter-point rate cut before the end of the year. For the sixth consecutive session, the dollar recorded a lower high against the peso. Yesterday, it stalled in front of MXN18.6854. The low, slightly above MXN18.5250, is a new low for the year. It is in an exceptionally narrow range today (~MXN18.53-MXN18.5525). There may be psychological support around MXN18.50, but we suspect the MXN18.35-MXN18.40 area is a reasonable target. Latam currencies were the top three performers among emerging market currencies yesterday (BRL +0.85%, COP +0.75%, and MXN + 0.60%).
Reviewed by Marc Chandler
on
July 24, 2025
Rating:
